Mark Carney Is Using A New Tool To Deflate The British Housing Bubble (EWU, EWUS)

Friday

Nov 29, 2013 at 9:00 PM

Mamta Badkar

Home prices have been picking up in London and the Bank of England has acted to avoid a housing bubble.

On Thursday, Mark Carney said the central bank would stop the Funding for Lending Scheme (FLS) that it announced last year to boost mortgage lending.

Carney heads the Financial Policy Committee (FPC), which was created to maintain financial stability and act as the macroprudential authority.

What does that mean? Macroprudential policies requires commercial banks to act "prudently" and identify risks to financial stability in the form of exposure to runs, excessive leverage and so on. And one of the advantages to macro prudential policy is that "it can be targeted at the specific sector that might be threatening financial stability," American Economist Donald Kohn explained in a Brookings paper.

And that's just what Carney seems to be doing. He pointed out that rising property prices could come as a shock to households and hurt banks' balance sheets.

"We did not see an immediate threat coming from the housing market, but we are concerned about the prospective evolution of that market in the absence of some of these changes," Carney said in a press conference on the Financial Stability Report.

"… So the concern is where this could go. We definitely see short-term momentum, and we're starting from relatively high levels of valuation and indebtedness of households.Those are the challenges."

The FPC created a "new macroprudential tool" to ensure that underwriting standards stay up to the mark. The tool: "the ability to vary the affordability criteria that mortgage borrowers must meet." From the report:

"The Financial Conduct Authority (FCA) should require mortgage lenders to have regard to any future FPC recommendation on appropriate interest rate stress tests to use in the assessment of affordability."

The Bank's decision to act early shows us two key things, according to Brian Hilliard at Societe Generale: first, that the rise in home prices are cause for concern, and second, that the bank is using macroprudential tools rather than monetary policy tools to address it.

"The more effective are these macroprudential measures, the more latitude will the MPC have to continue with its low interest rate policy and so allow a broader economic recovery to ensue," writes Hilliard. "We have already stressed that the market is building in too early expectations of rate increases Big forecast changes but still no BoE rate increase and these macroprudential measures add to our confidence in this regard."

Janet Yellen, who has now been backed by the Senate to be the next Fed chair, is clearly also in favor of using macroprudential tools to contain systemic risk.

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